Predicting the Future Position of American Express Shares in the Next 5 Years
It's been challenging to surpass the returns of the S&P 500 in the past five years, especially if you didn't have stakes in the "Magnificent Seven" tech giants. However, an exception is American Express (AXP, up 1.80%), which has delivered a total return of 160% in the same timeframe, with a substantial portion of that gain coming in the last year. The S&P 500, in comparison, has only provided a total return of 106% over the same period.
American Express has managed to revitalize its growth strategy by concentrating on travel and entertainment sectors. This focus has helped the company gain market share both domestically and internationally, thereby boosting its earnings.
Looking ahead, I believe the next five years for American Express shareholders will resemble the last five years. Here's why the stock is an attractive buy-and-hold option for your portfolio.
A silver lining
In 2015, American Express and Costco Wholesale parted ways, ending their long-term credit card partnership, which accounted for 10% of American Express' cards. Many investors grew concerned when Costco abandoned its partner, resulting in a decline in American Express' stock price. Over the subsequent years, the company struggled to grow as it adjusted to the terminated partnership.
Despite the initial challenges, this split has ultimately proven beneficial for American Express. Costco, with its significant bargaining power, offered less favorable unit economics for American Express, making a small contribution to its profits. Moreover, the termination provided American Express with an opportunity to refocus on the travel perks that distinguished it as a premium credit card brand.
Upon assuming his position as CEO in 2018, Stephen Squeri recognized the need for American Express to reinvest in travel and entertainment perks for its members. This included strengthening co-branded credit card partnerships, as well as providing cardmembers with travel and dining perks. American Express strengthened its airport lounges, which further enhanced its reputation within the travel sector.
By 2024, this strategy shift had generated substantial returns for American Express. Over the past decade, its earnings per share (EPS) have risen by nearly 150%. The company now adds more than 3 million new card accounts every quarter, with card circulation finally increasing after a 10-year stagnation at just over 100 million.
Expanding globally
American Express has held a strong position in the US credit card market and will likely maintain this position over the next five years, potentially experiencing incremental market share growth due to its popularity among Gen Z and millennial customers. However, it sees significant opportunities in international markets.
The company already has a robust presence in Mexico, Japan, and Australia, but there are numerous other countries it can target. Generally, a portion of any given country is attracted to premium travel credit cards, and management aims to enhance credit card incentives and merchant acceptance in these new markets. American Express' international card acceptance grew by 50% from 2021 to 2023.
American Express' international expansion benefits its US customers by reinforcing its value proposition. For instance, if American Express doubles its merchant acceptance in Mexico, expands airport lounges in Mexico, and offers more Mexico-related perks for cardholders, American travelers to Mexico can reap these benefits.
This flywheel is crucial to American Express' continued growth in the future. Management anticipates revenue growth at a 10% annual rate, which the company can achieve if its international division continues to expand.
American Express' stock in five years
American Express has ample potential for growth over the next five years. Market share gains, international expansion, and pricing power can help the company keep up with a 10% annual revenue growth rate and 15% annual EPS growth rate. Additionally, the company provides a 1% annual dividend yield.
Currently, American Express' price-to-earnings ratio (P/E) is 22. While this multiple has increased in the past year, it still remains within an acceptable range compared to the S&P 500's higher P/E of 30. Given its strong brand, I believe American Express deserves a P/E of 22 or more.
Given its projected EPS growth rate, it seems reasonable to expect American Express stock to grow in tandem with its EPS growth, yielding significant returns for investors over the subsequent five years, making it an attractive choice for buy-and-hold investors today.
American Express' focus on travel and entertainment sectors has significantly boosted its earnings, making it a potential buy-and-hold option for investors. This growth strategy, initiated after the company parted ways with Costco Wholesale, has resulted in an increase of nearly 150% in their earnings per share over the past decade.
Investing in American Express stocks could potentially yield significant returns over the next five years, considering its projected EPS growth rate and stable dividend yield. Its current price-to-earnings ratio remains within an acceptable range compared to the S&P 500, suggesting that the company's strong brand deserves a higher multiple.
